Greek drama just prelude to Italy failing

November 7, 2011

The past week global stock markets bounced up and down like a basketball at a Lakers game (if the NBA were playing). Up they went when news came the European Union worked out a deal to restructure Greek debt. Down they went when Greek Prime Minister George Papandreou decided to allow Greek voters to have their say on the deal. Then up they bounced again when he canceled the referendum.

The markets were closed when Papandreou’s government survived a confidence vote early Saturday in Parliament.

The bottom line is that the Greek government will effectively — but not officially — “go bankrupt in the end” — Mark Calabria told us; he’s director of financial regulation studies at the libertarian Cato Institute and was on the staff of the U.S. Senate Committee on Banking, Housing and Urban Affairs. “No one ever will admit to a real default or bankruptcy. But I have faith in Greece and the EU that they will work out a bankruptcy deal without calling it that. Greek debt will get a really large haircut.”

A “haircut” is what investors call it when bad debt is written off. Greece’s current debt to external creditors is $533 billion, equal to 174 percent of its gross domestic product. That’s more than the $407 billion owed by giant China, which is just 7 percent of that country’s GDP. By comparison, the United States today owes $14.98 trillion, or 99 percent of its GDP.

“Greece has no choice but really harsh austerity measures,” Calabria said. “Government-funded deficits will increasingly become impossible. They will put off austerity as long as possible, but there will be budget cuts and tax increases.” There also will be sales of government assets, which include even casinos and racetracks in the heavily socialist country.

Calabria said that, although the Greek people don’t want the austerity measures, they also want to remain part of the euro, the common currency used by most European countries.

The Greek crisis unfolded as the backdrop for the meeting in Cannes, France, last week of leaders of the Group of 20 industrial nations, including President Barack Obama. There’s something obscene about a crisis meeting pushing global austerity taking place in a major Mediterranean playground of the rich and famous.

“Greece is a proxy for Italy,” which is the big worry of the G-20, Calabria observed. He said Italy’s economy and debt problem are 10 times as big as Greece’s. “If you let Greece go down, what will you do with Italy?” He quipped that the crisis amounts to, “Will the German taxpayers bail out the French banks for holding bad Italian debt?”

Fortunately, America doesn’t hold too much of the Greek, Italian and other European debt. But our own massive federal deficits and debt give us enough problems. Not to mention state and local debts, including the California state government’s employee pension predicament, which a Stanford University study pegged at up to $500 billion in the red.

So much government debt makes no more sense than a person splurging on credit cards. The Europeans will have to solve their own problems. For us Americans, it’s time to start severely cutting spending to pay down our government debts, the more the better.